Introduction To Insurance – Ukaabest

What Is Insurance?

Insurance is a mechanism of risk transfer and sharing by pooling of risks and funds among a group of individuals who are exposed to similar kinds of risks for the benefit of those who suffer loss on account of the risk.

It is, thus, a financial tool specially created to reduce the financial impact of unforeseen events and to create financial security. Indeed, everyone who wants to protect himself against financial hardship should consider insurance.

In modern society, social security is available only to those who are employed in the organised sector. Insurance is considered one of the tools of social security for formal and informal sectors and is largely carried out in two ways.


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i. The first way is known as Social Insurance. Here, the State or government takes care of those who are subjected to losses due to some risk event. Examples are, providing a pension when one grows old or providing free medical treatment, meeting the cost of hospitalization etc. The fund for this purpose comes from a pool made up from taxes or mandatory social security contributions required to be made by all those who work and earn an income. The Employees’ State Insurance scheme (ESI) that provides medical care and other benefits to employees and Employees’ Provident Fund Organization (EPFO) that provides pensions and survivors’ benefits in the event of an employee’s death are the popular schemes under this head.

ii. The second way is through voluntary Private Insurance. Here, individuals and groups can buy deal from an insurance company by entering into a contract of insurance with the company.

The insurance company enters into a contract (an insurance policy) whereby it (insurer) undertakes, in exchange for a small amount of money (premium), to provide financial protection by agreeing to pay the insuring person (insured) a fixed amount of money (sum assured) on the happening of a certain event (insured peril).

Insurance companies collect Premium to provide for this protection and losses are paid out of the premiums so collected from the insuring public. In other words, an insurance contract promises to make good to the insured a certain sum in consideration for the premium received from the insured.

Insurance Company

Is a monetary establishment that gives a scope of insurance policies to safeguard individuals and businesses,contra to the danger of financial losses in return for standard payment of premiums.

How It Work

There are so many different types of insurance policies available, and virtually any person or business can find an insurancecompany willing to insure them—for a price.

The most common types of personal insurance policies are auto, health, homeowners, and life. Most people in the United States have at least one of these types of insurance, and car insurance is required by law

Need For Insurance

It helps individuals to pay for medical emergencies, contraction of any illness, hospitalisation, treatment, and medical care required in the future

Functions Of Insurance

  • Prevention of loss
  • It helps economic growth
  • Risk sharing
  • It provides capital
  • It improves efficiency
  • Above all insurance provides protection.

Risks and perils

Every day, we hear stories about accidents and other misfortunes that someone has suffered.

Some of these include:

i. All of a sudden, people fall seriously ill.

ii. Motor vehicles are stolen and people die or get injured in accidents involving motor vehicles.

iii. House and belongings are destroyed by fire.

iv. Large scale loss of lives and destruction of property in cyclones and tsunamis. Life is full of uncertainties and surprises. Protecting oneself, one’s families and society from these uncertain events has been one of the biggest concerns of man for centuries.


‘Risk’ is a term that we use to refer to the chance of suffering a loss as a result of uncertain events like the above.

The events that give rise to such risks are known as perils.

Some examples of perils  fire, a lightning strike, burglary and a hailstorm or windstorm.

We face many such risks in our day-to-day life including risks to our life, health, property and so on.

We don’t know whether and when something unfortunate will happen to us or our family members or property. It may not always be possible for us to prevent such a happening. For instance, we cannot prevent a storm or somebody’s death from occurring.

It is possible for us to take measures to reduce the financial consequences that arise due to the above mentioned risks and protect ourselves financially. One of the ways by which this is normally done is with the help of savings and investment.

We would have seen or learnt from our parents or elders about the need to save for the future. By saving or investing money, the money so accumulated can be used to cope with the loss. However, such savings can only give back our own money plus some returns.
What would happen if a human life is lost or a person is disabled permanently or temporarily?

A person dies suddenly. Where would the person’s family get the money from to support itself? How would the person’s family meet the various living expenses after his death?

A person suffers a paralytic stroke that leaves him permanently bed- ridden. Such an event would result in loss of income to the household and put the family in a lot of hardship.

The loss suffered is so large in all such situations that one’s savings may not be sufficient to take care of the financial burden.

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